Mortages and debts were key issues in the housing boom and bust and the financial crisis that followed. Mortgages, or the lack thereof, are one of the reasons why housing is still suffering even as the rest of the economy struggles to recover. Some recent developments point to possible improvements:
- News out this morning says that the government and five major banks are close to a settlement that will provide aid to homeowners with under-water mortgages. The five banks represent more than half of all mortgages. The agreement, which covers 49 of the 50 states, includes $5 billion in cash penalties payable to home owners and another $20 billion in assistance for reducing loan balances or refinancing existing mortgages at lower rates.
- Consumers are more willing to spend and to borrow money to spend. The Fed’s recent report on consumer credit showed strong gains in credit outstanding in the fourth quarter of 2011. While most of the world is working to reduce debt levels, we must remember that modern economies live on credit — if there were no credit we would be in a deep deep recession.
- Another sign of better results ahead is yesterday’s report from the Mortgage Bankers Association that mortgage applications are rising.
- Despite the news of consumer borrowing, mortgage debt outstanding was still shrinking last fall. The Fed’s Flow of Funds report through the third quarter of 2011 — the full year data is due next month — shows a continuing decline in home mortgages in the US. Until this rises, there will be little if any demand-side pressure to boost home prices.